Monday, June 26, 2017

Why The Next Recession Will Morph into a Decades Long Depressionary Event...Or Worse

Economists spend inordinate time gauging the business cycle that they believe drives the US economy. However, the real engine running in the background (and nearly entirely forgotten) is the population cycle. The positive population cycle is such a long running macro trend thousands of years in the offing that it's taken for granted. It is wrongly assumed that upon every business cycle downturn, accommodative monetary and fiscal policies will ultimately spur greater demand and restart the business cycle once the excess capacity and inventories are drawn down. However, I contend that the population cycle has been the primary factor in ending each recession...and this most macro of cycles is now rolling over. Without this, America (nor the world) will truly emerge from the next recession...instead it will morph into an unending downward cycle of partial recoveries...contrary to all contemporary human experience.

The evidence for my contention begins with the 25-54yr/old US population, which peaked in December 2007 and remains below that peak ever since (this population is presently about 400k fewer than Dec of '07). However, total US full time employment is now 3.6 million above the previous peak in 2007. This 25-54 to FT employment relationship is now 1:1...just as it was in 1980 and 1970.

Annual change in 25-54yr/old US population vs. annual change in total full time US employees (below). The macro population cycle provided millions of new adults (consumers) and their increased demand restarted the more frequent gyrations of the micro business cycles...until 2008 and again now in 2017. Some may take note that the Federal Reserve cost of money (the Federal Funds Rate in blue) generally followed the population cycle, only making some deviations for the business cycle along the way.But the change per 8 year periods of the 25-54yr/old population and total US full time employment turns out to be not so dissimilar. In fact, it's a pretty nice correlation.

And so, since population growth means so much...two differing views on where this population is headed. In red, the Census and in black, an unbiased view of growth based on the child bearing population, birth rates, and current and future immigration trends.

Why would I feel such confidence in a lowered estimate of growth? Check the '08 Census projection for the 0-24yr/old US population through 2050 (blue line, chart below) and the massive downgrade of growth by the 2014 projection update (red line). And it is still far too optimistic and the upcoming projection update will only further downgrade upcoming population growth, based on the ongoing declining birth rates combined with huge declines in illegal immigration since '09.But if we widen out to the 15-64yr/old population vs. US full time employees...the chart below details both sets.

Taking a look at the annual 15-64 population growth should be pretty telling. 2008 wasn't a debt crisis...it was an end of an atypical period of abnormally high growth which so many had assumed was in fact "normal".The chart below taking the 8 year changes in the wider 15-64yr/old US population vs. full time employment.

Charting the change in the core population of the US vs. full time employment. During each downturn in full time employment, the growth in the core population continued and eventually pulled the business cycle to a fresh start. However, as the population cycle slowed the downturns were deeper and recoveries slower due to minimal growth in demand from the population cycle.

Below, focusing from the turn of the century 'til now, the downtrend of core population growth is very plain and the negative impact on the business cycle should also be easily understood. The expected Federal Reserve response is of course interest rate cuts to incent record quantities of new debt...to maintain the unsustainable present. The next economic downturn will see no buoying impact of the core population growth to exit the downturn.Anyway, the chart above makes it plain that the population cycle of the broad core of the US (and in fact, that of the 0-64yr/old population) is now on the precipice of turning Japanese...also known as depopulating (see chart below).

The next business cycle recession will be unending and is very likely to run years into decades and perhaps a century or more. A declining population already indebted with record debt and zero interest rates will consume less...meaning overcapacity and excess inventories will never be fully cleared before the next downturn...and on and on and on.

But the absence of a growing consumer base isn't just a US issue...this is a global problem. The annual growth of the 0-64yr/old population of the combined OECD nations (most the EU, US, Canada, Mexico, Chile, Japan, S. Korea, Australia / New Zealand) plus China, Brazil, and Russia show the growth that has driven nearly all economic growth has come to an end...and begins declining from here on. And when importers are shrinking, exporters have no one to export to...and on and on and on. A recent article helps to detail the depopulation we are now facing...not simply a demographic issue that so many believe, HERE.

The end of growth is the start of the SHTF scenario in which we now find ourselves. While this situation offers short term nirvana to investors, the economic repercussions are ultimately disastrous.

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